Treasury selloff signals need to bolster Fed's inflation credibility, Musalem tells FT

St. Louis Fed President Alberto Musalem urged the Federal Reserve to increase interest rates to maintain credibility in fighting inflation, citing a preferable gradual approach.

A selloff in U.S. Treasuries ​this week signaled the need for ​the Federal Reserve ‌to earn ​its inflation-fighting "credibility" with interest rate increases, St. Louis Fed President Alberto Musalem told the Financial Times. "At this ‌juncture, earlier, incremental, gradual interest-rate action is preferable, less costly and less disruptive than potentially later, larger and abrupt actions," Musalem, who is not a voting ‌member of the Federal Open Market Committee this year, told the ‌FT.

Musalem, who sits on the rate-setting body, told the newspaper he had "expressed a preference" towards a quarter-percentage-point interest rate increase at this week's policy meeting, where the Fed ⁠left rates ​unchanged. The interest ⁠rate decision and a hint from Fed chief Kevin Warsh that the central bank ⁠may look to change its inflation goal posts helped send 30-year Treasury yields ​above 5.2%, a 19-year high.

The widely expected decision to leave policy on ⁠hold drew dissents from three of the 12 FOMC members who wanted a quarter-percentage-point hike ⁠instead. The ​Three Fed officials who dissented expressed concern on Friday that without an immediate increase in short-term borrowing costs inflation will stay ⁠stuck above the Fed's 2% target, where it has been for more than ⁠five years.

Traders ⁠are betting a 67% chance on a 25-basis-point rate hike in September, according to CME Group's FedWatch tool.